China is being bombarded with luxury goods, but how are the Chinese to know which brands are truly chic and which are passe? In a lively, well-attended seminar titled "China's booming luxury market", the European Chamber invited speakers Tom Doctoroff and Jancu Koenig of advertising firm J. Walter Thompson to speak at the Radisson Hotel in Shanghai on July 18 on how to best position luxury products in China.

Doctoroff, president of JWT China and author of the book Billions: Selling to the New Chinese Consumer, shared his insights on Chinese consumer behaviour with regard to luxury items. He began his talk with a point about the dilemma Chinese shoppers face: A wide array of brands are available to them, but they are relatively uneducated about them. "It's become a tangled glob of glitter," he said. But although most brands are an undifferentiated mass in their minds, some brands manage to stand out. But how can a brand grab their attention?

An important thing to keep in mind is the way Chinese view luxury goods, which is quite different from how Americans, Europeans or Japanese view them. Luxury has always existed in China, whether as fine silks or ritualised massage tools, but it has always served a specific function within the culture. "Products address cultural imperatives," said Doctoroff. In "Confucian" Chinese society, he added, luxury "shows where you stand, and what you represent," and has now become very closely associated with brands.

Luxury goods in China are used as tools to openly demonstrate one's status, and so are almost always consumed or displayed in public, rather than in the privacy of the home as in Europe. Expensive beer and cognac, for example, convey success and are always drunk on site, said Doctoroff.

Perhaps owing to the visual-representational nature of Chinese writing, Doctoroff argued, Chinese people are trained to be very sensitive to visual markers, which is why logos have become so important: The proliferation of logos on women's handbags was the single most important factor in their rise in popularity. "Acronyms and symbols help make sense of brands," he said. However, as Chinese consumers become more sophisticated, there is a trend away from large, obvious logos towards understatement.

Youth movement

Not only is China the world's third-largest luxury market (and climbing), said Doctoroff, it is also the world's youngest. Three of China's five richest people are in their 30s, he pointed out, and Chinese people begin buying luxury-branded goods far younger ages on average than in most other markets - and at far lower incomes as well. More than a third of 22- to 27-year-olds spend their full salary each month, he said, with a monthly salary of RMB5,000 being "where we start selling diamonds".

A market covering such a wide range of ages - not to mention regional quirks - naturally becomes quite segmented. Doctoroff broke down a few basic market segments - established, older consumers; aspiring young up-and-comers (which he termed "new luxury"); independent women; and youth - and their various motivations for using luxury products. All, he said, are motivated by what he called the "Confucian conflict" - the tension between living in a regimented, hierarchical society and having the ability to move upward within it. Unlike Westerners, he said, Chinese tend to strive to fit within the established rules, but unlike Japanese, they also seek to stand out by their success within the system.

Established luxury consumers, Doctoroff said, need to display connoisseurship and mastery, to show that they indeed "belong at the top", whereas aspiring younger consumers need to show their worth, but without making their ambition too blatant. Women aim to "sparkle", showing their ambition and modernity, but while preserving their "Chineseness" and "gentle femininity". Youth, meanwhile, want to advance, but don't yet have the means. Luxury brands need to give them an example to follow, by extending their brands downwards to youth-oriented segments, as in the case of Armani Exchange or Versace's Versus brand.

Doctoroff concluded his presentation with three main rules for luxury brands entering the Chinese market: (1) "come in big" - make your brand widely visible, but protect its exclusivity; (2) educate consumers about your brand's history and heritage by demonstrating the process by which your products are made and a lifestyle that can be emulated; and (3) innovate - continue to create new models to stay fresh and stay ahead of counterfeiters.

Timeless lessons

Koenig provided a case study of Rolex's experience with revamping its brand image in China. As an early mover in the Chinese market, he said, Rolex had become associated with the first post-revolutionary crop of wealthy Chinese in the 1980s, who were seen as stuffy and corrupt, which made it difficult to connect with younger generations of consumers. But, as Rolex's international image has long been closely linked with exploration and high achievement, it saw an opportunity to link itself with the drive of younger Chinese people to "be the best".

It did this through maintaining a strong advertising presence in print and on television. Its advertisements usually detailed inspirational stories of exceptional people who, as Koenig put it, "have earned the right to wear a Rolex": concert pianist Lang Lang, the first Chinese players to win the women's doubles title at Wimbledon and international figures like Roger Federer as well. On the education front, Rolex ran ads detailing the painstaking craftsmanship with which each watch is made, both to connect consumers with the brand and make them more aware of what makes a genuine Rolex. It also innovated by continuing to release new models and getting away from its older, clunkier image.

Both speakers gave video demonstrations of successful (and unsuccessful) TV commercials for luxury products in China, and answered questions from the audience afterwards.

Hypers to hawkers

In the annual business confidence survey carried out by the European Chamber in the summer of 2006, it emerged that the number one reason for European companies doing business here was to "produce goods in China for the Chinese market". This trend shows a clear move away from the traditional view of China as a production base for export towards China as a strategic domestic market.

In recent times the European Chamber in Shanghai has been organising events to examine this important new market. In May of this year a seminar was held on market research, and a presentation was held in July on luxury brands. On August 9, the Chamber was delighted to welcome Oliver Rust, executive director of client services at ACNielsen China, to deliver a presentation titled "Hypers to Hawkers: Consumer Behaviour in China".

Rust began by saying that the changing socio-economic structure of China is dramatically affecting the amount of money people have and the ways they spend it. With the rise in personal income throughout the country, there is a corresponding growth in disposable income, leading a diversification in expenditure. In developed markets in the region, typically 25 percent of income is spent on food. The figure in China is still quite a bit higher but it is expected to follow this trend. Investing in stocks and shares and exploring the world on holidays abroad are high on the list for those with some money to spend.

As with almost everything in China, there is an important need to understand the spectrum of wealth. It also would not be a discussion about China without some talk about tiers of cities. What is interesting is that consumers in second- and third-tier cities are diversifying their expenditure more rapidly than the traditional markets of Beijing, Shanghai and Guangzhou did when they were at comparable stages. Adding this to the uniqueness of regional culture and tastes, it is crucial that retailers adapt accordingly. In retail, it would be naïve to have a "China-wide strategy" - the market is simply too large and diverse for just one plan.

Focusing on the FMCG (fast moving consumer goods) retail trade, Rust continued by highlighting how "Modern Trade" - a term encompassing modern retail stores, hypermarkets, supermarkets and the like - has fared in China thus far. Basically, the retailers are doing extremely well. Frequency of visits already shows numbers that are higher than those in more developed markets; in a recent survey, 61 percent of those questioned said they had been to a hypermarket in the previous seven days. However, since the market is so enormous, no one retailer has secured a national market share of more than 1 percent - even the well-known big retailers, domestic or foreign.

"With growing consumer wants and less time to shop, a one-stop shop is seen as increasingly attractive to the new, modern urban dweller," said Rust. With the saturation of the larger established markets, location is no longer the key factor as consumers demand a wider product range and modern, comfortable stores. In the newer markets, proximity to home still remains the top factor when choosing where to shop.

There is a clear change in the structure of retailing, with the large hypermarkets leading the charge. Rust concluded by showing a number of "battlegrounds" that will determine how retailers succeed over the coming years. The key one is fresh produce, in which wet markets still have the upper hand. Developing store loyalty will be important (56 percent of those surveyed said that they had visited three different retail outlets in the previous month - a relatively high figure). Of course, pricing structures and promotions will also play a significant role but other less obvious factors such as changing transportation methods, facilities for home storage and the possibility of online shopping will also affect how the FMCG market evolves over the coming years.

The European Chamber in Shanghai will continue to hold events on the topic to keep member companies up to date on the freshest challenges and opportunities in retail and distribution.

Cleaner development

On a sweltering Shanghai morning, the European Chamber organised a particularly pertinent event titled "Clean Development Mechanism (CDM) in China: Challenges and Opportunities", which addressed the impact of climate change on European businesses in China, on July 26. It was the first in a potential series of seminars on the CDM, so express your interest if you want more on this topic.

The CDM is a market instrument that came into being under the auspices of the Kyoto Protocol. It allows developed countries to offset their "carbon footprint" - the measure of the amount of carbon dioxide they emit through fossil-fuel combustion - by transferring clean technologies to developing countries. These clean technology projects are subject to a review process that in turn grants them a certain amount of certified emissions reduction credits, or CERs, which can be bought and sold on carbon exchange markets. Europe is the world's biggest carbon exchange market, as companies there have to meet certain carbon reduction goals each year.

The CDM event assembled a well-informed panel of speakers. Wang Yong and David Arthur of top environmental consultancy firm ERM book-ended the presentations, while Peter Corne, a lawyer with Eversheds and chair of the Chamber's Legal Working Group, spoke in between.

Wang outlined the effects of global warming and climate change, presenting a number of facts, figures and statistics that scotched global warming scepticism. He noted that Shanghai was especially susceptible to rising sea levels because the city itself is already sinking. From 1921 to 1965, Shanghai sank 2.6 meters, he said, though that rate has decreased in recent years.

Corne gave a thorough explanation of how the CDM and is implemented in China. He noted that with China's 2006 Renewable Energy Law the central government has offered many incentives for clean technology projects. If these projects create CERs which are then sold, he said, revenues must be shared by the project owner and the Chinese government in the following order: 2 percent of revenues to the government in renewable energy projects; 65 percent in HFC/PFC reduction projects; 30 percent in N20 projects. He added that CDM projects must be majority Chinese-controlled, so a minimum 51 percent Chinese stake is required.

Arthur advised European companies in China to use existing CDM methodologies, because developing new ones can be expensive and slow. An ERM project with Shell in Nigeria, for example, has taken eight months and US$100,000 (€75,000) because it uses a new methodology. Arthur also noted that CERs are not the only carbon credit format; companies can also use verified emissions reduction credits, or VERs. These credits have low monetary value and do not count against Kyoto Protocol emissions targets, but are useful for reputation management and still benefit the environment.

A lively question and answer session followed. Some in the audience wondered if CDM gave developed nations a licence to pollute, while others thought it let China, now said to be the world's top carbon emitter, off the hook too easily. But the panel was firm. Corne summed up its position: "China's problem is the world's problem."

The Grameen Foundation in China

Microfinance is often considered one of the most effective and flexible strategies in the fight against global poverty. It is sustainable and can be implemented on the massive scale necessary to respond to the urgent needs of those living on less than US$1 (€0.75) a day, the world's poorest. On August 7, 2007, the European Chamber was delighted to welcome Kate Druschel, regional coordinator for East and Southeast Asia with the Grameen Foundation, to give a presentation on the work the group is doing in microfinance, particularly its ambitious plans to expand its operations in China.

Inspired by the work of Grameen Bank in Bangladesh, the Grameen Foundation was created in 1997 to help share the Grameen philosophy and accelerate the impact of microfinance on the world's poorest people. Microfinance generally means very small, unsecured loans which are usually under US$200. The clients then typically use traditional skills and entrepreneurial instincts to start, sustain or develop small, self-sustaining businesses. The Grameen Foundation supports microfinance programs that enable the poor, mostly women, to lift themselves out of poverty and make better lives for their families. To do this, they partner with a worldwide network of microfinance institutions (MFIs), providing resources and management assistance.

In China, the Grameen Foundation's work and indeed microfinance in general has been slow to take off due to the lack of a clear legal framework and tight government regulations, which have restricted where the Grameen Foundation works and how it operates. However, the People's Bank of China initiated a pilot program in six provinces in 2005 to establish commercialised microfinance companies, laying the foundation for a legislative base.

With more than 220 million people living on below US$1 a day, China is the second-largest potential market for microfinance, after India. China's poorest people struggle to gain access not just to food, healthcare and education, but also to financial services. Microfinance is a proven success: 95 to 99 percent of loans are repaid in full and on time. The repaid dollars are then used to provide more loans and the cycle keeps going, empowering more and more people out of poverty. With the gradual opening of the Chinese market to microfinance institutions, the Grameen Foundation is ready to provide the assistance, resources and technology needed to increase the opportunities for the poorest of the poor.

The Grameen Foundation's presence in China began in 2001 with one loan to one partner and up until 2005 involved limited technical assistance and support. In 2006 it launched a new strategic initiative and now has three strong microfinance partners; one in Sichuan province, one in Inner Mongolia and one in Beijing. Their strategy here is twofold: to spread the reach of the microfinance institutions that they are currently supporting, and to increase the profile of microfinance in general in China. Through their work in China, the Grameen Foundation will provide its Chinese MFI partners with capital for on-lending, tailored packages for capacity building and technology solutions.

After the presentation, Druschel spoke about the leverage that the Grameen Foundation has in China. With a name like Grameen and a founder like Nobel laureate Mohammed Yunus, the Foundation has increased the profile of microfinance all over the world. She also spoke about the operational issues that are faced within microfinance institutions where many face the same problems as other companies in China - namely retaining loan officers, setting up a reliable system and ensuring good corporate governance at all times.

The European Chamber was delighted to host this event and promote the work of the Grameen Foundation in China. The Chamber fully intends to cooperate with the Grameen Foundation's work in China. Please do not hesitate to contact us if you would like further information on their activities here.